Singapore becomes a destination for junk

Oct 4 (IFR) - Companies in Southeast Asia are looking at Singapore as a viable alternative for high-yield bond issues in amounts that would be too small for dollar investors.

The push comes as so-called junk bonds became a predominant theme this year in the Singapore market, with a record number of small-cap and sub-investment grade companies selling debt in the Lion City, attracting investor interest by offering juicy coupons.

Data from Thomson Reuters showed that close to S$5bn (US$4.02bn) of high-yield deals were done to date this year, compared with an estimated S$4.4bn and S$3bn in 2012 and 2011. Many of these deals were for amounts smaller than US$100m, too small for the dollar market.

This has attracted companies such as unrated Indonesian conglomerate Rajawali Group, which this week started a series of roadshows in the island republic for a potential Reg S deal.

At the same time, Indofood Agri Resources announced its plans to diversify into the Singapore market via a new S$500m MTN programme. There were also rumors of Indian and lower-rated Thai companies looking at coming to Singapore with bonds.

YIELD HUNGER

The issuers are being attracted by the ability to print bonds at lower coupons than they would get in their home markets, which in some cases do not even have investors that buy high-yield at all.

Meanwhile, in Singapore, last year, investors became renowned for embracing perpetual securities and for chasing yields. And with most of them focused on holding on to the bonds, secondary prices very seldom fall below par.

This has helped Singapore become a consistent source of funds for issuers in the region, being available even at times when the US dollar market was tight.

In 2011, a record US$6.2bn of local currency bonds were printed in the city-state just as dollar markets froze amid the European crisis and the downgrade of the United States.

The swelling appetite from private bank is partly to blame. Various research reports estimated that the combined wealth of high-net worth individuals in the country held US$857bn in assets in 2012.

STEADY NOW

But a recent foray by Perisai Petroleum suggests that even yield-hungry Singapore investors may draw the line at some point.

The Malaysian high-yield company raised only S$23m of three-year bonds despite the backing of three joint leads and two co-leads, and a generous yield of 6.875%.

The transaction served as notice that even private bank clients, who had thrown money at any high-yielding name last year, are now hesitant about taking on unknown foreign issuers.

Rattled by indications from the Federal Reserve in May that its board could halt monetary easing policies, local investors started pulling back and increased their target yield levels to cushion expected rate increases in the future.

Syndicate desks report that private bank clients are balking at taking on more risk exposure, and that less leverage is being given to them, although no lines have been pulled.

Institutional investors have also been wary and a number of Singapore dollar bonds have recently traded below par, albeit to a lesser extent than US dollar ones.

Bankers think that the market, however, remains reliable, noticing that there is still demand for recognizable names.

"Foreign names come to Singapore because they know it is a viable and accessible market," said a syndicate head of a foreign bank. "The Singapore bond market is still substantial, and getting along quite healthily despite the last few months of volatility."